Case U85

Members:
RA Hayes SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 7 April 1987.

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Dr R.A. Hayes (Senior Member)

The review

In the 1985 tax year the applicant in this review was employed as a sales manager by a footwear retailer. The claim before the Tribunal involves a deduction, disallowed by the respondent, of $270 calculated as follows:

                                          $
      Twelve pairs of shoes
      purchased during the year at
      average cost of $30                360
      Less considered private             90
                                        ----
      Total                             $270
                                        ----
          

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ATC 492

The facts

The applicant was unrepresented at the hearing. She said on oath that she was obliged to purchase from the employer and to display the employer's expensive footwear by wearing it in her work as a sales manager. From the above calculation, the applicant considers that as a direct result of her employer's policy, she was required to purchase "four times the number of pairs of boots and shoes that would be purchased to be fashionably dressed in any other environment".

The footwear sold by the employer, in over 20 separate shoe stores, is expensive. Some of the footwear is manufactured by or for the employer, using high quality imported leather. The footwear might be described as "high fashion". It is promoted through fashion magazines and other such media.

The applicant was recently promoted to the position of "managing director" of the employer's operations. She is still required to purchase the employer's footwear. For example, a forthcoming issue of Mode magazine will carry an advertisement for high fashion ladies' boots manufactured by her employer. She has been required to purchase a pair of these boots, which would retail at around $260, at a cost of $130. It is the policy of her employer that these boots, or other currently fashionable footwear sold by the employer, be worn by her when she is representing the employer in fashion promotions, during interviews and other liaison with fashion writers, and in her work generally in representing her employer's interests within the fashion and retailing industries.

The applicant wore the particular pair of boots in question at the hearing. She said that they were not the kind of thing that she would normally buy. The applicant said, and I accept her expertise in these matters, that ladies' leather court shoes might be priced from anything from $49.99 to $125 per pair. Of course, some would spend much more, and would set aside expensive pairs "for best".

A letter from the employer was in evidence. It confirms that it is the policy of the employer:

"that sales staff are required to display on their feet the firm's footwear of the style currently being promoted.

The staff are required to purchase the footwear worn by them...."

The applicant has some responsibility in implementing that policy. She gave evidence, which I accept, that she has dismissed two of the employer's sales staff for refusing to purchase and wear the employer's footwear. The applicant accepts that she must purchase and wear the employer's footwear of the style currently being promoted. If she were to refuse to do so it would result in the loss of her position. Wearing and displaying the employer's footwear in the style currently being sold is part and parcel of the job of working in a sales or promotional capacity for that employer. This is probably generally true of the fashion industry. The applicant was emphatic that it was true of her employer. I accept her evidence on this point, and indeed, no effort was made on behalf of the respondent to challenge it.

I find that the applicant in this review was in effect a fashion model for her employers. And I find, from her evidence, which was unchallenged, and the material comprised in Exhibit A, which was not challenged, that the applicant needed footwear beyond the average, both in quality, quantity and diversity in order to carry on the aspect of her work, clearly dictated by her terms of employment, that she should display her employer's footwear of the style currently being promoted.

The issue

It is convenient, in considering the applicant's case, to put it at its highest. So stated, it is as follows:

• As part of her terms of employment, the applicant is required to purchase and wear footwear of a style different from, at a price higher, and in quantities greater than would be the case if left to her own devices, under threat of dismissal by her employer should she fail to comply with its directive in this regard.

If stated as such, is the applicant entitled to succeed in her claim, brought under sec. 51 of the Income Tax Assessment Act 1936?

Section 51(1) of the Act provides as follows:

"All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a

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ATC 493

business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income."

Interpretation of sec. 51, as applied to footwear required for work

Section 51 of the Act has of course been given extensive judicial and Tribunal consideration. While recognising the differences in the wording of the taxing statutes of the respective countries, some words of Lord Brightman, interpreting the English Act, in
Mallalieu v. Drummond (1983) 2 A.C. 861, seem particularly pertinent here. In the course of his speech, Lord Brightman referred to
Hillyer v. Leeke (Inspector of Taxes) (1976) 50 T.C. 90, and in particular, to the judgment of Goulding J. in that case, which Lord Brightman found to be correct and on point. Quoting the words of Goulding J., Lord Brightman said (at p. 876), on the question of whether clothing falls into the category of an outgoing of a private or domestic nature, and is thus excluded from deduction pursuant to sec. 51:

"The truth is that the employee has to wear something, and the nature of his job dictates what that something will be. It cannot be said that the expense of his clothing is wholly or exclusively incurred in the performance of the duties of the employment... in the case of clothing, the individual is wearing clothing for his own purposes of cover and comfort concurrently with wearing it in order to have the appearance which the job requires... [W]here the clothing worn is not of a special character dictated by the occupation as a matter of physical necessity but is ordinary civilian clothing of a standard required for the occupation, you cannot say that the one purpose is merely incidental to the other Reference is made to...
Norman v. Golder (Inspector of Taxes) [1945] 1 All ER 352 at 354... where Lord Greene MR said, referring to the food you eat and the clothes that you wear: `But expenses of that kind are not wholly and exclusively laid out for the purposes of the trade, profession or vocation. They are laid out in part for the advantage and benefit of the taxpayer as a living human being'."

In Hillyer v. Leeke (Inspector of Taxes), Goulding J. was considering the case of a taxpayer who was a computer engineer. His work involved travelling to the establishments of his firm's customers. He was required by his employers to wear a suit. When present on a customer's premises the taxpayer might have been called on to assist an engineer at short notice without an opportunity of changing into overalls. He therefore kept two working suits which he wore only for the purposes of his work. He claimed a deduction for their upkeep. Goulding J. went on to say, in the passage quoted with approval by Lord Brightman in Mallalieu that:

"The expenditure in question, although on suits that were only worn while at work, had two purposes inextricably intermingled and not severable by any apportionment that the court could undertake."

These passages amply demonstrate the difficulties in the path of the applicant's claim. Many people, if they did not work at all, or if they did not work for a particular employer, or pursue a particular avocation, might well clothe themselves in garments and footwear radically different in style and price to that which their employer, or employment, demands. But the fact that they have to change styles, and pay more, because of the very fact of working, or because training and employment opportunities dictate work for a particular employer, or in particular employment, does not make the cost of that different clothing an outgoing incurred in gaining assessable income.

Furthermore, the respondent, if the applicant's argument were to prevail, would be required in the large number of cases to be engaged in the most invidious of calculations. Take, for example, items such as the expensive boots which the applicant said she would never be tempted to buy were she working for some other employer, or in some other field of employment. If not wearing the boots while at work and while travelling to and from work, she would have to be wearing something else. Inevitably, the wearing of the boots performs a private purpose, even though the wearer would be happier in some other style of footwear. The respondent would thus be involved in unravelling purposes, and apportioning and allocating costs, which were, in the words of Goulding J. in Hillyer, "inextricably

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ATC 494

intermingled and not severable by any apportionment that the court could undertake".

It was not suggested that the requirement of wearing the employer's footwear while at work constituted a requirement that a uniform be worn (compare the State Bank officers' uniform considered in Case R55,
84 ATC 411. The applicant's employer required a particular standard of dress with very definite dress requirements, that is to say, footwear from the employer's range, and purchased from the employer. These requirements do not go so far as to make the footwear in question a uniform. And it makes no difference that the dress requirements are of a standard set by a single employer, with his or her particular commercial goals, rather than by employers generally in an area, or by general professional standards applicable to a taxpayer's chosen avocation.

Finally, it adds little to the applicant's case that it was a condition of the applicant's contract of employment that she follow her employer's dress requirements, so that she could be dismissed for non-compliance. There have been many cases similar to the one at hand where, while not an expressed term of the employment, it was perfectly clear that had the standard dress requirements not been followed, the taxpayer would thereby have been precluded from even embarking upon the income-producing work (for example, the secretary to the State Governor's wife who is compelled [to wear] hats and shoes of a quality and kind which she would not otherwise have purchased: see Case S85,
85 ATC 619).

The "abnormal expenditure" test

This does not exhaust the arguments for deductibility. The applicant's claim that her conditions of employment required her to provide an abnormal number and variety of pairs of shoes leads inevitably to consideration of the "abnormal expenditure" test, under which, for example, a deduction was allowed in respect of a mannequin/model's abnormally large wardrobe (Case M50,
(1961) 12 T.B.R.D. 266).

Doubt has recently been cast on the validity of the "abnormal expenditure" test. Thus, in Case S85 the No. 3 Board of Review (M.B. Hogan, Chairman, Dr P. Gerber, Member) considered a claim by the secretary to the wife of a State Governor in respect of clothing, including in part the substantial number of outfits, including hats and shoes, that she had to buy of a quality and kind which the taxpayer would not otherwise have purchased. In rejecting the taxpayer's claim, Dr Gerber questioned whether the "abnormal expenditure" test had not been overtaken by events. However, it is important to note that the claim of the Governor's secretary in Case S85 was for the cost of the more formal clothing that she had to buy in her position, rather than its abnormally large quantity. Indeed, there was no suggestion that the taxpayer in Case S85 purchased more clothing than normal. The claim was that it was of a different quality and kind, and more expensive, than would otherwise have been the case.

The "events" to which Dr Gerber referred in Case S85 included that of Mallalieu v. Drummond, discussed above. Again, this (and Hillyer's case, discussed therein) did not concern claims of abnormally large wardrobes. Rather, as in Case S85, they were concerned with special clothing requirements in a particular vocation.

In the interests of consistency in Tribunal decision-making, once the claim is recognised as one for an abnormally large footwear wardrobe, I see no reason to depart from the "abnormal expenditure" test as applied in a similar situation in the fashion model's case, Case M50.

On my analysis, the applicant's case is one of asserting that while the footwear possessed no characteristics to distinguish it from conventional dress, the requirement of buying it in such large quantities had the same effect, making it deductible under sec. 51(1) of the Act. Because of the requirement of displaying the employer's footwear currently in fashion, the applicant is required to purchase more pairs of shoes than would otherwise be the case. She would, she said, have purchased only three pairs of shoes during the 1985 tax year, but because of work demands in that year, had to buy nine more pairs - for the purpose of keeping the employer's shoes on display, as the seasons, and fashions, changed.

This leads to the next problem for the applicant. The onus rests upon the taxpayer to adduce sufficient proof that the expenses that she has incurred are over and above what might be considered "normal" (see, for example, Case T47,
(1968) 18 T.B.R.D. 242; and Case M28,
80 ATC 187).

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ATC 495

As in the fashion model case, Case M50, it becomes a matter of quantum. But there is a paucity of evidence in this review. Nevertheless, the applicant gave evidence on what she needed in the way of footwear over the year in question for her private and work purposes. And this was not challenged by the respondent. It was only three pairs, out of the twelve which she was required to purchase from her employer.

The "abnormal expenditure" test is concerned with comparing "normal" expenditures with "abnormal" ones required by the demands of a particular employer, or kind of employment. The pertinent question is, what would have been the "normal" expenditure on footwear of a female footwear sales manager.

Immediately, another difficulty surfaces in this complex skein of argument. The applicant, and her sales staff generally, are entitled to a discount on footwear purchases from their employer. In making the comparison between "normal" and "abnormal" footwear expenditure, does one use discounted, or retail, prices? All of the applicant's purchases were at discounted prices. Had no discount been available to her, her "normal" footwear requirements, although less in terms of numbers of pairs than those actually purchased because of the special requirements of her particular employer, would have cost nearly as much as, and possibly even more than the abnormally large numbers purchased at discount prices. Let us say, for example, that she would normally have purchased only three pairs. On her evidence, the cost to the public of these three pairs of shoes would have been between $150 and $375, not the $90 allowed by her in her return.

The apparent harshness of the employer's requirement that its sales staff, including the applicant, buy large numbers of pairs of the employer's expensive footwear so that it might be modelled before customers, fashion writers, and the like, is meted to some extent by its allowance of a very generous discount. And it follows from this realisation that the comparison should be between an assessment of "normal" expenditure at retail prices with "abnormal" expenditure at discount prices.

The applicant would be most austere if, as a sales manager for a high fashion footwear retailer, she were to limit herself to three new pairs of shoes per year, in the normal course of events. Six would be much nearer to the mark. However, the applicant's evidence was not challenged on this point, and accordingly, I am not disposed to pluck some other figure out of the air. There is a little more evidence on the retail price of the shoes which she would "normally" have purchased over the 1985 tax year. I doubt whether she would have been content with cheap shoes, which might be in the $49.99 range. Equally, she would not have been spending $260, the retail price of the glamorous boots for which she paid $130. The discounted price of the three pairs of shoes she bought in 1985 was $30 per pair. There is evidence that up to 50%-70% discount was offered by her employer. This would put the retail price at up to $100 per pair, assuming the discount to be 70%. On this calculation the "normal" expenditure would have been between $180-$300 as compared to the amount actually spent (at discounted prices) of $360. Absent better evidence, it is appropriate to fix the price of her normal purchases at $100 per pair. Thus, my decision will be to set aside the determination under review, but on the basis of a deduction calculated as follows:

                                                      $
      Twelve pairs of shoes
      purchased during the year at
      average cost of $30                            360
      Less "normal" expenditure on
      shoes                                          300
                                                     ---
      Total                                          $60
                                                     ---
          

ORDER

1. That the decision under review be set aside;

2. That the matter be remitted to the respondent with the direction that a deduction of $60 be allowed in respect of the expenses claimed in the income tax year ended 30 June 1985.